August 2015

We specialize in providing flexible short-term hard money and transactional loans for real estate projects. We also invest in equity of strong real estate projects with proper leverage and strong sponsors.

Welcome.

It is our goal to keep our investors, borrowers, closing agents, and other stakeholders informed and in-touch with the latest developments at TF Management Group LLC. We aim to accomplish this by providing you updates, education and industry news through this Monthly Newsletter. We hope you enjoy it and welcome your feedback.

This month features:

Recent deal examples

Commonly asked questions

Mike Zlotnik,Managing Director

Recent Deals Examples

Jacksonville, Florida

Purchase price $63,000

Rehab $15,000

After repair value $125,000

Loan Amount $88,000

Funded August 14, 2015

Spring Valley, California

Purchase Price $316,201

Rehab $38,000

After repair value $480,000

Loan Amount $330,000

Funded August 21, 2015

Commonly Asked Questions

How to adjust your investment strategy in response to the recent Stock Market Volatility?

First of all, don’t panic!

Relax!

This is not 2008. Banks are not in trouble, and the whole financial system is fairly sound. There is plenty of liquidity. So, it is unlikely to be a crash. This is just an overdue correction. Technically speaking, 10% drop from the peak is a correction territory – we just corrected. This is not yet a bear market (haven’t reached a 20% drop level).

The market went through the very rapid correction due to the computerized algorithmic trading by the large investment banks – they move the markets fast, and make big moves because they have a lot of capital.

The correction has been overdue for a while. The whole market has been trading at the high PE, too high to be able to sustain it. The correction was needed to bring stock prices in line with a corporate earnings growth. The economy appears to be still on solid footing. There is certainly a degree of nervousness related to China’s market correction, and slower economic growth.

Where does the market go from here?

Certainly there is still room for further correction. We might even enter a technical bear market (20% correction from the peak). Conversely, we might “bottom out” very soon and stabilize. I am not going to speculate on that. Your guess is as good as mine. I don’t see a crash coming, nor a rapid recovery. We are going to see volatility for a while. The Market will be much more sensitive to news, making bigger up and down moves in the Fall. Overall direction is unclear.

There is this completely coincidental 7 year “bear market” cycle in play – look back to 1987, 1994, 2001, 2008 and now 2015. It appears to be a pattern of the market taking a beating every 7 years. If you are a believer in patterns, then 2015 will end up in the negative territory, might be even a significant correction. I don’t completely subscribe to this theory, but the pattern is there, and we have observed the initial shock in the market…

So, what to do now?

The number one rule of investing is DIVERSIFICATION.

If you have enjoyed the stock market ride for the last 7 years, your asset allocation to the stocks might be too high, and it is only prudent to move some money into alternative asset classes.

What are the options on the table?

Government or investment grade corporate bonds are just too risky given the very low yield that they pay. If the rates move up, then these assets will decrease in price and provide actually a negative return. Risk Adjusted Return in this asset class is not great at all. For the most part I would stay out of it.

The Commodities and Energy sector have seen a massive correction recently. But the fundamentals are not great. It might take a while before that whole sector can look bullish again. Many companies in the sector are over-leveraged, and present a risk of further equity price declines. They are burning cash, and I wouldn’t recommend buying their stocks now. Commodities themselves could be an interesting play. Buying commodities don’t pay any dividends. It would be a pure long term buy and hold for asset price improvement play.

I believe that a much better alternative is Real Estate, both Debt and Equity opportunities.

Investment in Debt (Mortgage / Deed of Trust / Mortgage pool fund) provides an excellent source of income, it is secured by the underlying asset(s) /equity. It is much more predictable than many other asset classes. This sector is not without risk, but it is a well understood risk in most cases. Risk Adjusted Returns are still very solid in this space. In today’s environment, most individual Notes (secured by Mortgage or Deed of Trust), or Mortgage pool funds, provide a yield 8-12% range. Many institutional investors have moved capital into this space because it is so attractive. This has caused some “yield compression”, but it is still a very good area to be in comparison to other asset classes.

Now, let’s look at Equity investments in Real Estate today. Many markets have recovered significantly after the crash. Investors should exercise great care selecting opportunities carefully. I personally wouldn’t invest just for the appreciation – most of the low hanging fruits have been picked. Now, the appreciation growth is likely to slow down. Every market is different of course. I believe the opportunity today is in the strong cash-flow “turn-key” residential properties.

The opportunity is to buy properties that provide a good yield, e.g. 8-9% CAP rate, and then add cheap debt mortgage leverage. Some banks finance investment properties with rates in the high 4s (30 year fixed). There is also, hedge fund capital available with the rates in the high 5s – mid 6s percent. Many are “turn-key” SFRs with repair and vacancy reserves; 75% mortgage leverage can generate yields north of 10% cash-on-cash. It is not a bad number at all. Depreciation will shield income from immediate taxation, and amortization and appreciation will build wealth slowly but surely. Note: It is important to select markets with a good mix of current yield and historic appreciation. Going just for the highest yield will likely reduce the appreciation to almost zero. Conversely, high appreciation markets would provide very little yield. The trick is to find a Golden Middle, mixing up decent cash-flow/yield with a historically decent appreciation.

In conclusion, now is the time to re-evaluate your portfolio diversification. Perhaps, it is the time to move some capital from the high volatility environment of the stock market to a much more predictable Real Estate Debt and Equity opportunities.

I would personally be glad to chat with you about the Real Estate Debt and equity space opportunities, and various investment strategies. Feel free to reach out via an email or text (best way to reach me).